Back in November in a Business Matters episode, we posed a quiz question to you on the time it would take for ships from Asia to reach Europe if they went around Africa, instead of through the shorter, Suez Canal route. This was for a discussion on climate change. We honestly didn’t expect that it would become the topic of a future episode of Business Matters.
The Suez Canal sees cargo worth more than 15% of global trade passing through it. Ever since Houthi rebels began attacking merchant ships in the Red Sea October last following Israel’s assault on the Gaza strip, shipping traffic through the canal has been affected.
In an IMF blogpost, the Portwatch portal estimated that the volume of trade that passed through the Suez Canal dropped by 50% year-over-year in the first two months of the year, and the volume of trade transiting around the Cape of Good Hope surged by an estimated 74% above last year’s level.
Just to give you an idea of how trade routes have changed, the IMF-Portwatch blog post that tells us that on Jan 1, 2023, the 7-day moving average in million metric tonnes via the Suez Canal and that around Africa were comparable – they were 4.52 and 3.63 respectively. Cut to March 4 of this year, that figure for Cape of Good hope was 7.63 and that for the Suez Canal was a lowly 1.8. That’s quite some divergence.
Led by the US, a coalition of countries is now launching counterattacks against the Houthis. Even with the passage of time, there is still no sign of the conflict on the Red Sea going down. And for the first time the conflict saw a fatal attack by the Houthis – two crew members on a merchant shift died during an attack.
What is India’s trade via Red Sea and to which countries?
India uses the Red Sea to trade with markets in Europe, east coast of the US, and bordering countries of Africa and Asia.
A businessline report from earlier this year indicated that this route would have enabled overall merchandise trade with Europe and North Africa, accounting for about 50% of imports and 60% of exports, totalling $113 billion.
What is happening now?
In January, Delhi-based research entity, Research and Information System for Developing Countries estimated that exports from India could decline by up to $30 billion this fiscal if the crisis in this crucial international trade route did not subside.
And sure enough such warnings have only become more dire. A more recent report by the Federation of Indian Export’ Organisations indicated an impact on our exports in the region of $60 billion.
Naturally, we are also seeing an increase in the cost of trade. As early as in in the first week of January, we saw freight rates doubling from $700 per container to Saudi Arabia before the crisis to $1500 per container thereafter.
At the time, FIEO chief Ajay Sahai had said "all kinds of surcharges are being applied such as peak season surcharge of $1500 and Red Sea/contingency surcharge of $1500-$3000.”
With this increase, insurance costs will rise in tandem, because the more time that ships spend on the seas, the higher the risk of mishaps or that from pirates.
In another sign that cost of trade is indeed going up, last week, Danish logistics major Maersk announced an increase of a whopping $1,000 per container of cargo to be transported. Earlier, whenever there was a rate increase, the company used to calibrate the prices to size of container. This time around, the flat rate was applicable to containers of all sizes.
Ironically, it was in October last that the IMF downgraded estimates for trade growth by 0.8 percentage points. In an interview last month, IMF chief economist had acknowledged that even those estimates for growth seem optimistic. He had said the Q3 trade data was weaker than expected and indicators for Q4 remained subdued.
“This is mainly due to weaker growth in Europe, significantly impacting global trade.” But, he had pointed out that the impact of the conflict in the Red Sea was still moderate for global trade “thanks to lower freight costs compared to their 2021 peak, moderate demand, strong inventories and available container shipping capacity.
But, if the crisis continues, however, its impact on trade and inflation could worsen significantly, especially in Europe, he had said.
So, how long this impact on trade will last is anybody’s guess. Even the impact on exports and imports are only estimates now. When stocks run out and new orders have to be placed will we know the true impact of delays, higher costs and risks involved.
Script and presentation: K. Bharat Kumar
Production: Shibu Narayan
00:00 – 00:26 - Intro
00:27 - 01:59 - How trade routes have changed
02:00 - 02:30 - What is India's trade via Red Sea?
02:31 - 04:56 - What is happening now?
04:57 - 05:16 - Conclusion
05:17 - 06:12 - Did you know?
06:13 - 07:10 - Quiz questions
